ANFI is a fast-growing specialty Indian rice provider. For the three months ended June 30, 2012, revenue was up 19% to $80 million, from $67 million in the year-earlier period. Profit was up 76% to $3.3 million from $1.7 million.

However, the operating company is Amira India, which is two levels removed from the public, British Virgin Islands registered company ANFI. This is the same structure employed by Chinese companies, which is why there are few, if any, Chinese IPOs anymore in the U.S.

Even worse, the primary shareholder of ANFI (the British Island public-to-be shell) is owned 100% pre-IPO by Karan A. Chanana, who also incidentally will own 14% of the operating company (Amira India), two levels down from ANFI. The actual operating company, Amira India, will get most of the public funds.

This ANFI IPO report is based on a reading and analysis of ANFI's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Observations

IPOdesktop has several observations that, in total, raise red flags about how protected the public shareholders are in this IPO.

First, we observe that Chanana owns 100% of the British Virgin Island registered shell, pre-IPO (see page 118 in the S-1), which puts him in total control of the entity receiving the public proceeds.

Second, he is also the chairman, chief executive officer, and director. There are seven directors and only three are so-called "independent directors" (see page 103 in the S-1.)

Third, it seems that transactions happen that are not arm's length. For example, consider this transaction (from page II-1 in the S-1.):

On February 20, 2012, we issued 100 ordinary shares, par value $1.00 per share, to Joseph F. Daniels in exchange for $100, and on February 29, 2012, Mr. Daniels transferred all of such shares to Karan A. Chanana for consideration of $1,000. On May 24, 2012, such 100 ordinary shares of par value $1.00 per share were divided into 100,000 ordinary shares of par value $0.001 per share.

Enforceability of Civil Liabilities

Public shareholders have absolutely no recourse (see page 46 of the S-1):

ANFI is incorporated in the BVI and our primary operating subsidiary, Amira India, is incorporated in India. The majority of our directors and executive officers are not residents of the United States and substantially all of our assets and the assets of such persons are located outside the United States. As a result, it may not be possible for you to effect service of process within the United States upon such persons or us. In addition, you may be unable to enforce judgments obtained in courts of the United States against such persons outside the jurisdiction of their residence, including judgments predicated solely upon U.S. securities laws.

There is uncertainty as to whether the courts in the BVI would enforce judgments obtained in the United States against us or our directors or executive officers, as well as the experts named herein, based on the civil liability provisions of the securities laws of the United States or allow actions in the BVI against us or our directors or executive officers based only upon the securities laws of the United States.

Finally, concurrent with the IPO, Chanana will be issued almost five million more shares. That's about 25% more than the the 19.66 million shares he owns pre-IPO of ANFI (see page 118 of the S-1):

Includes the 4,919,089 ordinary shares issuable pursuant to an exchange agreement under which Mr. Chanana will have the right, subject to the terms of the exchange agreement, to exchange all or a portion of his Amira India equity shares for ANFI ordinary shares, and assumes the completion of Mr. Chanana's purchase of 11.6% of the existing outstanding equity shares of Amira India prior to or upon the completion of this offering.

Conclusion

IPOdesktop simply believes that the operating company should be the public vehicle, not the British Virgin Islands shell, and that there should be more "independent" directors than insider directors. IPO investors prefer to invest directly in operating companies, not IPO shells. Therefore, IPOdesktop would pass on the ANFI (shell company) IPO.

Business

ANFI is a leading global provider of packaged Indian specialty rice, with sales in over 40 countries today. ANFI generates the majority of its revenue through the sale of Basmati rice, a premium long-grain rice grown only in certain regions of the Indian subcontinent, under the flagship Amira brand as well as under other third-party brands.

ANFI sells its products, primarily in emerging markets, through a broad distribution network. ANFI launched its flagship Amira brand in 2008 and now sells branded products in more than 25 countries.

In fiscal 2010, 2011, and 2012 ANFI generated 53.4%, 61.9%, and 66.0%, respectively, of revenue outside of India. ANFI expects to increase its international presence over time. ANFI currently has international operations in Malaysia, Singapore, UAE, the United Kingdom, and the United States. ANFI also sells its products throughout Asia Pacific, EMEA and North America.

Recognition

Since 2010, Amira India has been recognized each year by the World Economic Forum as a global growth company, an invitation-only community consisting of approximately 300 of the world's fastest-growing corporations, including companies such as illycaffe SpA and Intralinks. In 2010 and 2011 Inc. India, a leading Indian business magazine, identified Amira India as one of India's fastest growing mid-sized companies.

Market and Trends

Rice industry in India: The Indian rice industry was valued at approximately $40 billion in wholesale prices in fiscal 2011, with Indian consumption estimated at approximately 91 million metric tons of milled rice in fiscal 2011 and exports at 2.3 million metric tons, based on CRISIL Research. From fiscal 2006 to 2011, the Indian rice industry has grown in value at a CAGR of 10.5%, according to CRISIL Research. Industry sources expect growth to continue in India, with marginal increases in production and continuous growth in demand due to population growth, increasing purchasing power of the Indian population, and inflation.

Price trends: Within the Indian wholesale market, the average price of rice has increased at a CAGR of 9.5% since fiscal 2007 to reach an average $434 per metric ton in fiscal 2011, according to CRISIL Research. Meanwhile, export prices for Basmati rice, which commands premium pricing, have increased at the higher CAGR of 15.9% in the same time period to reach $1,064 per metric ton in fiscal 2011.

Pricing is affected by other factors including weather, Government of India policies (e.g., changes in minimum support prices and minimum export prices), prices of other staples, seasonal cycles, and the demand and supply balance.

Production trends in Basmati rice: Globally, Basmati rice contributes 1.5% of total rice production, of which 65% to 70% is produced in India and 30% to 35% is produced in Pakistan, according to CRISIL Research. The Indian Basmati rice market was valued at approximately $4 billion in fiscal 2011, of which 45% to 50% relates to Indian consumption and 50% to 55% relates to international sales, according to CRISIL Research. While Basmati rice producers in India have managed to move up the value chain by improving quality and branding, the growth of the industry in Pakistan has been relatively moderate. As a result, India remains the world's largest Basmati rice supplier.

Competition

With respect to ANFI's Basmati rice, ANFI competes with numerous types of competitors in the fragmented and unorganized Basmati rice market, from other large Indian processors to smaller businesses in India and around the world. Basmati rice has historically only been grown successfully in the Indian states of Haryana, Uttar Pradesh, Uttaranchal, Punjab, Jammu and Kashmir, and Rajasthan, as well as in a part of the Punjab region located in Pakistan that enjoys the climatic conditions required to successfully grow Basmati rice. However, a type of rice similar to Basmati rice is also grown and sold as Basmati rice from California and Texas, among other places, and ANFI faces competition from producers of these types of rice.

Many competitors in the markets for ANFI's rice and other food products have a broader product selection, greater processing capacity, brand recognition advantages in certain Indian and international markets, and significantly greater financial and operational resources. Also, since there are no substantial barriers to entry to the markets for ANFI's rice and other food products, increased consolidation and particularly a more organized Basmati market could significantly increase competition. That could increase costs to purchase raw materials, lower selling prices for products, and reduce ANFI's market share and earnings.

Number of Employees: 252

Pre-IPO Shareholder

Karan A. Chanana: 100%

Organizational Structure

The public company is registered in the British Virgin Islands. The public company intends to buy stock in a 100%-owned subsidiary, Amira Mauritius.

Then Amira Mauritius intends to buy equity shares in Amira India -- the actual operating company -- which is 14.6% owned by Chanana. This type of organization structure is common among many Chinese companies looking to IPO in the U.S., which is one reason why Chinese IPOs are basically not welcome in the U.S.

Use of Proceeds

ANFI expects to net $113 million from its IPO. ANFI intends to use $110 million of net proceeds to fund the purchase by Amira Mauritius of equity shares of Amira India pursuant to the share subscription agreement, which will occur contemporaneously with the completion of this offering, and to retain $3 million to fund future operating expenses of ANFI through 2015.

Net proceeds of $110 million to be received by Amira India pursuant to the share subscription agreement are intended to be used as follows:

$25 million to partially fund the development of a new processing facility; and

$85 million to repay term loan facilities and a portion of the indebtedness under secured revolving credit facilities.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.